Corporation tax rate

It has been announced that the rate of corporation tax will increase from 1 April 2023 to 25%. However, the existing rate of 19% will continue to apply to small companies (those with profits of up to £50,000) and a tapered rate will apply to those with profits between £50,000 and £250,000. Legislation to effect this change will be introduced in FB 2021. Any deferred tax calculations used to prepare statutory accounts should reflect the future rate increase for periods ending on or after the date FB 2021 has been substantively enacted.

As a consequence, the rate of diverted profits tax will also increase by 6% to 31% from the same date. In addition, the government will review the surcharge of 8% on UK banks to ensure that such banks remain competitive with their main competitors in the EU and the US.

The lower rate of corporation tax on smaller companies means that the government has missed the opportunity to address the imbalance between the tax burden on companies compared to small self-employed businesses, although the relatively low threshold before profits start being taxed at the marginal rate may cause those businesses with ambitions for growth to think twice before incorporating.

Losses

There is good news for companies and unincorporated businesses making trading losses in 2020/21 and/or 2021/22. They will be able to carry back these losses for up to three years to offset against taxable profits (for companies) or net income (for individuals) in those years on a last in first out basis. The loss carryback extension applies to a maximum of £2m for each company, corporate group or unincorporated business per loss-making year. As well as a group cap of £2m, each company within a group is limited to a cap of £200,000 per loss-making year. The ability to carryback to the previous 12 months remains unlimited.

Companies will need to weigh up the respective benefits of claiming a tax refund now through relieving earlier year profits at a rate of 19% or carrying forward losses into a regime that has become more flexible since 2017 at a rate of 25%. Most companies will probably take the cashflow benefit now, especially where COVID-19 measures make it difficult to forecast the extent of future profits, but this is a trade-off to be given serious thought.

Changes are also being made to the loss carry forward rules for companies to ensure they work as intended.

In particular, amendments will apply retrospectively from 1 April 2017 to ensure that groups have access to the deductions allowance to which they are entitled prior to a change in ultimate parent through acquisition or demerger. This will be achieved by allowing a company to be nominated to submit a group allowance allocation statement (GAAS) after a group ceases to exist for periods up to the date the group ceased to exist.

Other changes applicable to accounting periods beginning on or after 1 April 2021 include:

• extending the time limits for submitting an original GAAS to include enquiry time limits;
• removing the requirement for a nominated company to submit a GAAS where no group companies have used any carried-forward losses in the period; and
• allowing carried forward losses to be group relieved where the surrendering company has covered its profits fully.

Overall, the intended impact is to make it easier and more efficient for companies and groups to utilise their carried forward losses.

Capital allowances

From 1 April 2021 to 31 March 2023, a “super deduction” of 130% will be available to companies incurring expenditure on qualifying plant and machinery (P&M). This will generate a reduction in tax of 24.7p for every £1 pound spent. There are some exclusions to the assets eligible for the relief, broadly those that have been excluded from first year allowances in the past as well as used and second-hand assets and expenditure on contracts entered into prior to 3 March 2021 even if expenditure is incurred after 1 April 2021.

Expenditure on special rate assets (eg, hot and cold water systems and other ‘integral assets’) will attract a 50% rate and a 9.5p tax reduction.

Special disposal rules will apply to assets that have been claimed to these allowances. Disposal receipts will be treated as balancing charges (taxable profits), instead of being deducted from a P&M pool. The disposal value will also be uplifted by 30% to take account of the fact that the relief on the original expenditure was greater than 100%. Where disposals occur in accounting periods straddling 1 April 2023, the uplift will be calculated on a pro-rata basis. This rule does not apply to the 50% first-year allowance for special rate expenditures.

While the 130% allowance may appear a very attractive proposition, the impact of the 130% uplift to disposal proceeds should be borne in mind when making investment decisions. The fact that the corporation tax rate is increasing to 25% means that the disposal proceeds may be taxed at a higher rate than that at which relief was originally provided on purchase of the asset. This will be of particular relevance where the disposal proceeds are expected to be significant or the asset will be resold within a relatively short timeframe.

An anti-avoidance provision will apply to counteract arrangements which are contrived, abnormal, or lacking a genuine commercial purpose and other existing anti-avoidance rules apply, including the exclusion of connected party transactions from first-year allowances.

As was already announced on 12 November 2020, the existing annual investment allowance (AIA) limit of £1m will continue to apply until the end of 2021, after which it is expected to return to £200,000. As the super deduction is not available to unincorporated businesses, they will be expected to continue to claim the AIA. Since special rate expenditure for companies will only benefit from a lower rate of deduction, they should consider allocating the AIA first to special rate assets.

These proposals are likely to have the greatest impact on large companies, given that most smaller ones will already have their entire capital expenditure covered by the AIA. Large companies will also suffer higher corporation tax rates in the future and so this measure is likely to incentivise them to invest now rather than at a time when their AIA and other allowances are being relieved at a higher tax rate.

Freeports

The Chancellor announced the introduction of eight new “Freeports” around England which will attract favourable tax and other incentives. These include the following capital allowances benefits:

• An enhanced 10% rate of structure and building allowances for the construction of structures and buildings brought into use on or before 30 September 2026.
• Enhanced capital allowances on qualifying expenditure by companies on or after site designation until 30 September 2026 on plant and machinery for use within Freeport tax sites.

It was also announced that SDLT relief will be made available for purchases of land and property by 30 September 2026 within the Freeports, subject to that land or property being acquired and used for qualifying purposes and subject to a control period of up to three years.

New and certain expanding businesses in Freeport tax sites in England will benefit from a five-year period of business rates relief for periods commencing before 30 September 2026.

Subject to Parliamentary approval, relief from employer national insurance contributions for eligible employees will be available in all Freeport tax sites from April 2022 until at least April 2026.

Tax treatment of COVID-19 measures

Where a business makes a payment to a public authority to repay a relief from an expense which had the purpose of supporting the business in connection with coronavirus (eg, business rates relief), it may claim an income tax or corporation tax deduction equal to the lower of the repayment and the original liability being relieved, provided the liability would itself have been deductible. The deduction will arise in the same accounting period as the original liability would have been due and paid.

Leases extended due to COVID-19

Capital allowances anti-avoidance legislation relating to leases that have been extended as a result of COVID-19 is being turned off. This applies to long funding leases and short leases which become long leases as a result of the extension. The date of the extension must be between 1 January 2020 and 30 June 2021 and the consideration under the lease must be substantially the same as, or less than, the consideration under the lease before the change. Either party to the lease may elect to disregard this measure, which will be binding on both parties.

Research and development (R&D) tax reliefs

A consultation document relating to R&D tax relief was issued alongside the Budget.

The document looks widely at the nature of private-sector R&D investment in the UK, how that is supported or otherwise influenced by the R&D relief schemes, and where changes may be appropriate. In particular, it considers:

• How the SME and R&D expenditure credit (RDEC) relief schemes support R&D in the UK, including how they operate, how they interact with the way modern R&D is done, and the main differences in design between them.
• Whether the schemes should be amended to remain internationally competitive and keep the UK at the cutting edge of innovation.
• Whether the definition of R&D and the scope of what qualifies for relief remain fit for purpose.
• Whether current rates of relief, and the difference in rates between the two schemes, remain appropriate.

ICAEW’s Tax Faculty will be responding to the consultation.

A summary of responses to last year’s consultation on the scope of expenditure qualifying for R&D tax credits was also published. This consultation had considered whether data and cloud computing costs should be brought within the definition of qualifying expenditure. The government agrees with respondents that there is a strong case for doing so but a final decision on this will be taken alongside the wider review of R&D reliefs mentioned above.

Anti-avoidance legislation designed to prevent abuse of the payable R&D tax credit available to SMEs will come into force on 1 April 2021 as planned. The measure caps the tax credit each year at £20,000 plus three times the company’s total PAYE and NICs liability for the year. However, an exemption applies where a company is creating or preparing to create intellectual property (IP) or managing IP and less than 15% of its R&D qualifying expenditure is spent with connected persons. A couple of changes have been made to the provisions compared to the draft legislation published in November 2020.

• Where a company has an accounting period (AP) that straddles 1 April 2021, the measure only affects the next full period starting after that date. This will give companies confidence that they will not need to apply the new rules to a current AP. 
• The definition of IP whose management can support the company being exempt from the cap will be widened so know-how and trade secrets are included. This will cover cases where companies are not able, or do not wish, to protect the results of their R&D through trademarking, etc.

Corporate interest restriction

Two specific amendments will be made to the corporate interest restriction rules through FB 2021:

• The rules as they apply to real estate investment trusts are amended to take into account that UK property businesses of non-resident companies are now within the charge to corporation tax, rather than income tax. This applies from 21 July 2020.
• No penalties will arise if there is a reasonable excuse for an interest restriction return being filed late. This applies from 1 April 2017.

Hybrids and other mismatch rules

A number of changes are being made to the hybrid and other mismatch rules to ensure that the regime operates proportionally and as intended. These rules implement the OECD BEPS Action 2 recommendation and act to remove double deductions for the same expense or a deduction for an expense where there is no corresponding receipt being taxable They apply in various prescribed arrangements involving cross-border or UK domestic transactions.

Among other changes, the scope of income treated as dual inclusion income is to be extended with retrospective effect. Previously, this was income which is taxed twice – once in the jurisdiction where a hybrid entity is resident and secondly in an investor jurisdiction. No adjustment can be made if there is a corresponding double deduction for the same amount as no tax advantage has arisen in this instance. The definition of dual inclusion income is being extended to include income that is fully taxed but not subject to any corresponding deduction in any territory which has a tax akin to corporation tax.

National insurance for self-employed individuals

The spending review confirmed that the government would use the September CPI figure as the basis for setting all national insurance limits and thresholds, and the rates of class 2  and 3 national insurance contributions for 2021/22. The class 3 rate is set to increase from £15.30 a week in 2020/21 to £15.40 a week in 2021/22.

The NIC class 4 upper profits limit is aligned with the income tax higher rate threshold which is being frozen at £50,270 from 6 April 2021 until 5 April 2026. 

Business rates

The Treasury confirmed that the government will publish an interim report on its review of business rates on 23 March, as well as the consultation responses it has received. The final report will not be published until the autumn.

The Budget announced that eligible retail, hospitality and leisure properties in England will continue to benefit from 100% business rates relief from 1 April 2021 to 30 June 2021. This will be followed by 66% business rates relief for the period from 1 July 2021 to 31 March 2022, capped at £2m per business for properties that were required to be closed on 5 January 2021, or £105,000 per business for other eligible properties. 

Construction industry scheme  

The draft legislation published on 12 November and on which the Tax Faculty commented in ICAEW REP 05/21 will be reproduced unchanged in FB 2021.